Deal reached on new government for Germany under Merkel

Angela Merkel will return as German chancellor for a third term under a coalition deal hammered out with her old Social Democrat (SPD) opponents.

Her conservative Christian Union (CDU/CSU) signed a 185-page agreement with the SPD entitled "Shaping Germany's Future".

Mrs Merkel spoke afterwards of "mutual trust" while SPD leader Sigmar Gabriel said it was a fair deal.

The deal two months after the elections was welcomed abroad.

The CDU/CSU fell short of a majority in September while their traditional coalition partner, the Free Democrats (FDP) won no seats, leaving Mrs Merkel to look for a new coalition partner.

Analysis

By Stephen EvansBBC News, Berlin

Under the deal, the SPD gets a minimum wage and a lower retirement age and Chancellor Merkel's Christian Democrats get agreement that taxes will not rise.

The broad thrust of German policy is unlikely to change. The new government will balance its spending against incomes.

One intriguing policy is an agreement to introduce higher road tolls on foreign drivers. It is not clear how that would work or whether it would fall within European law.

The agreement has to be ratified by the membership of the SPD but the leadership will sell it as a real improvement in the lives of Germany's increasingly numerous low-paid workers.

It may also strengthen Chancellor Merkel's position on Europe. In the past, she has had to get agreement within the Bundestag for German participation in bail-outs via a debate and a vote on the floor of the Bundestag. In future, she will have the overwhelming majority a cross-party grand coalition brings.

'Not perfect'

The breakthrough came after 17 hours of tense negotiations.

The deal for the "grand coalition" will now go to a ballot of SPD members to be signed off, with the result expected in mid-December.

She said the coalition would stand for "solid finances, secure prosperity and social security" and oppose a "debt union" in Europe.

But cabinet posts would not be announced until after the SPD vote, she added.

Italian Prime Minister Enrico Letta welcomed the agreement in Rome, saying: "The news arriving from Berlin overnight of a decisive step forward over the programme, the deal for a grand German coalition, to me seems to be positive news because a lot of time has passed and I believe that there is a need for a German government as soon as possible."

Investors and traders also hailed the agreement, with German shares outperforming others in Europe.

The centre-left German daily Sueddeutsche Zeitung said the pact was not perfect but that the SDP ought to back it.

"You can't expect more from a grand coalition than small steps," it argued. "But is it worth rejecting? Surely not."

Detailed document

The parties reached settlements on issues including a lower retirement age and changes to dual citizenship rules.

The SPD won a key demand for a nationwide minimum wage. An hourly minimum of 8.50 euros (£7.11; $11.55) will come into force in the country for the first time in 2015.

The parties also agreed that there would be no tax increases, a key demand of the CDU/CSU.

Key points of the deal

National minimum wage of 8.50 euros, from January 2015

Opposition to mutualisation of eurozone countries' debt

No more new debt at federal level from 2015

Children born in Germany to foreign parents after 1990 allowed dual citizenship

Electricity to be 40-45% from renewable sources by 2025, but subsidies cut

Levy for foreign motorists using German motorways

Workers who contributed to pensions for 45 years able to retire at 63

"The work is done. It has been very intense and sometimes very hard work today but I think we have a result that is good for our country which is the main measure, but we can also say the result has a strong Conservative imprint," said Hermann Groehe, CDU secretary general.

"No new taxes and no new debts."

Senior SPD MP Karl Lauterbach, quoted by the Associated Press news agency, said his party had "succeeded on the most important points" but would have to overcome "many reservations" among members.

"The Social Democratic signature on this coalition agreement is everywhere," he added.

The SPD previously formed a grand coalition with the CDU/CSU under Mrs Merkel in 2005-2009.

This time around, the partnership faces the twin tasks of rebalancing the eurozone's biggest economy and winning the support of the German public to tackle the eurozone's debt and banking problems.

At the election on 22 September, the CDU took about 41.5% of the vote, the SPD won 26%, the Greens 8.4%, and the former communist Left Party 8.6%.

The FDP narrowly failed to cross the 5% threshold for entering parliament.